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PBYI > SEC Filings for PBYI > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for PUMA BIOTECHNOLOGY, INC.

Form 10-Q for PUMA BIOTECHNOLOGY, INC.


14-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and the notes thereto included in Item 1 in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with our audited financial statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Unless otherwise provided in this Quarterly Report, references to the "Company," "we," "us," and "our" refer to Puma Biotechnology, Inc., a Delaware corporation formed on April 27, 2007 and formerly known as Innovative Acquisitions Corp., and all references to "Puma" refer to Puma Biotechnology, Inc., a privately-held Delaware corporation formed on September 15, 2010, prior to giving effect to the reverse merger transaction between the Company and Puma that closed on October 4, 2011. This transaction was accounted for as a reverse acquisition whereby Puma was deemed to be the acquirer for accounting and financial reporting purposes and we were deemed to be the acquired party. Consequently, our financial statements prior to the reverse merger transaction reflect the assets and liabilities and the historical operations of Puma from its inception on September 15, 2010 through the closing of the reverse merger transaction on October 4, 2011. Our financial statements after completion of the reverse merger transaction include the assets and liabilities of us and Puma, the historical operations of Puma, and our operations following the closing date of the reverse merger transaction.

Overview

We are a development-stage biopharmaceutical company based in Los Angeles, California with a focus on the acquisition, development and commercialization of innovative products to enhance cancer care. We aim to acquire proprietary rights to these products, by license or otherwise, fund their research and development and bring the products to market. Our efforts and resources to date have been focused primarily on acquiring and developing our pharmaceutical technologies, raising capital and recruiting personnel. As a development-stage company, we have had no product sales to date and we will have no product sales until we receive approval from the United States Food and Drug Administration, or FDA, or equivalent foreign regulatory bodies to begin selling our pharmaceutical candidates. Developing pharmaceutical products, however, is a lengthy and very expensive process. Assuming we do not encounter any unforeseen safety issues during the course of developing our product candidates, we do not expect to receive approval of a product candidate until approximately 2015.

We currently license the rights to three drug candidates:

PB272 (neratinib (oral)), which we are developing for the treatment of advanced breast cancer patients and non-small cell lung cancer patients;

PB272 (neratinib (intravenous)), which we are developing for the treatment of advanced cancer patients; and

PB357, which we believe can serve as a backup compound to PB272, and which we plan to evaluate for further development in 2013.

A large portion of our expenses to date have been related to the clinical development of our lead product candidate, PB272 (neratinib (oral)), and the transition of the neratinib program from the licensor. During this transition period, as we built up our infrastructure and assumed responsibility for the neratinib program, a duplication of effort took place that resulted in higher than normal operating expenses. We estimate the duplication of effort had an impact on research and development, or R&D, expense for the nine months ended September 30, 2012, of approximately $4.3 million. We anticipate that the transition will be completed by December 31, 2012.

The license agreement for PB272 established a limit for our expenses related to the clinical trials for PB272 that were ongoing at the time of the agreement. This capped our "out-of-pocket" costs incurred beginning January 1, 2012, in conducting these existing trials. We anticipate that we will reach the cost cap during the fourth quarter of 2012 which will result in a reduction of its expenses related to these existing clinical trials, and hence a reduction in our R&D expenses, as the licensor will be responsible for such costs. The licensor will be responsible for these expenses until the existing trials are completed. Additionally, our expenses to date have been related to hiring staff and the build out of our corporate infrastructure. As we proceed with clinical development of PB272 (neratinib (oral)), and as we further develop PB272 (neratinib (intravenous)) and PB357, our second and third product candidates, respectively, we expect our R&D expenses and expenses related to our third-party contractors will increase.

To the extent we are successful in acquiring additional product candidates for our development pipeline, our need to finance R&D will increase. Accordingly, our success depends not only on the safety and efficacy of our product candidates, but also on our ability to finance product development. Our major sources of working capital have been proceeds from private sales of our common stock.


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R&D expenses include costs associated with services provided by consultants who conduct clinical services on our behalf, contract organizations for manufacturing of clinical materials and clinical trials. During the three and nine months ended September 30, 2012, our R&D expenses consisted primarily of transition costs, as clinical trial responsibilities shifted to us and our outside clinical research organization, or CRO, salaries and related personnel costs, and fees paid to other consultants. We expense our R&D costs as they are incurred.

General and administrative, or G&A, expenses consist primarily of salaries and related personnel costs including stock-based compensation expense, professional fees, business insurance, rent, general legal activities, and other corporate expenses.

Emerging Growth Company

We are and will remain an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, until the earliest to occur of (1) the last day of the fiscal year during which our total annual gross revenues equal or exceed $1 billion (subject to adjustment for inflation),
(2) the last day of our fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act, which such fifth anniversary will occur in 2017, (3) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt, or
(4) the date on which we are deemed a large accelerated filer under the Exchange Act.

Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. We have irrevocably elected not to avail ourselves of this extended transition period for complying with new or revised accounting standards, and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other companies; however, we have elected to take advantage of certain of the reduced disclosure obligations and may elect to take advantage of other reduced burdens in future filings. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.

Critical Accounting Policies

As of the date of the filing of this quarterly report, we believe there have been no material changes to our critical accounting policies and estimates during the nine months ended September 30, 2012 from our accounting policies at December 31, 2011, as reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Results of Operations

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

General and administrative expenses:

For the three months ended September 30, 2012, G&A expenses were approximately $8.0 million. G&A expenses for the three months ended September 30, 2011 were approximately $333,800, as we had not commenced meaningful operations during that period. G&A expenses for the three months ended September 30, 2012 were as follows:

           General and administrative expenses    in thousands ($000)
           Professional fees                     $                 588
           Payroll and related costs                               511
           Business taxes and licenses                              21
           Facility and equipment costs                            143
           Employee stock-based compensation                     6,575
           Other                                                   187

                                                 $               8,025

Major expenses incurred in professional fees were legal fees for SEC filings, intellectual property review, contract review and general legal support. We expect to continue to incur significant legal fees in the coming periods. We expect the facility expense to increase compared to the three months ended September 30, 2012, as we have recently entered into a lease for satellite office space in the San Francisco area and will have additional rent expense beginning in November 2012 for the term of the lease. The monetary increase in rent expense will be approximately $20,250 per month in the first year and up to


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approximately $30,820 per month during the seventh year, the life of the lease. Employee stock-based compensation included in G&A expenses for the three months ended September 30, 2012 included approximately $110,100 related to employee stock option grants and approximately $6.5 million reflecting the increase in the valuation of the outstanding anti-dilutive warrant held by our CEO and President, compared to $0 for the three months ended September 30, 2011. The warrant was valued based on the assumption that we would be completing an equity financing of between $86 million and $100 million during October or November 2012 (see Note 4 in the accompanying notes to the condensed financial statements) using a Monte Carlo Simulation method. Previous valuations were based on projected equity raises of $15 million to $100 million in 2013 using weighted probability factors. The increase in the projected equity raise from June 30, 2012 to September 30, 2012 produced the $6.5 million increase in the warrant noted above.

In connection with the closing of the public offering that we completed in October 2012 (see Note 7 in the accompanying notes to the condensed financial statements), the exercise price and the number of shares underlying the warrant were established. Pursuant to the terms of the warrant, until October 2021, the warrant may be exercised to acquire 2,116,250 shares of our common stock at a price of $16 per share. The fair value of the warrant on the date of the equity closing using the Black-Scholes pricing model was approximately $25.8 million. The increase in the fair value of the warrant of approximately $12 million will be recorded as an expense in the fourth quarter of 2012.

All other costs such as IT support, travel, recruiting and postage were approximately $187,300 for the three months ended September 30, 2012. We estimate that we will need approximately $6 million to $7 million for G&A expenses over the next 12 months.

Research and development expenses:

For the three months ended September 30, 2012, R&D expenses were approximately $17.8 million compared to $0 for the three months ended September 30, 2011 as we had not commenced meaningful operations during that period. R&D expenses for the three months ended September 30, 2012 were as follows:

    Research and development expenses                    in thousands ($000)
    Outside CRO/licensor services                       $              13,626
    Outside other clinical development                                  1,975
    Internal regulatory affairs and quality assurance                   1,042
    Internal clinical development                                         817
    Internal contract manufacturing                                        71
    Employee stock-based compensation                                     248

                                                        $              17,779

Ongoing outside CRO and licensor service expense of approximately $13.6 million was incurred during the three months ended September 30, 2012. This included approximately $1.3 million of duplicate costs from licensor services for the ongoing clinical trials. When the transition is complete, we expect these duplicate charges to cease. We accrued approximately $1.3 million for licensor services provided during the three months ended September 30, 2012 and approximately $8.8 million for pass-through costs related to the clinical trials. We also incurred approximately $3.5 million for services rendered by our CRO for managing our existing clinical trials. The licensor transition and clinical trial cost represent our estimate of such costs for the three months ended September 30, 2012, and will be adjusted accordingly as the actual costs become known.

Outside other clinical development expenses, which are comprised of costs for data management, outside consultants, contract manufacturing and other clinical services, of approximately $2.0 million were incurred during the three months ended September 30, 2012. Internal expenses, which include all employee-related costs such as payroll, benefits and travel, were approximately $1.0 million for regulatory affairs and quality assurance, approximately $0.8 million for clinical development and approximately $71,100 for contract manufacturing. Employee stock-based compensation included in R&D expenses for the three months ended September 30, 2012, was approximately $248,200. Given the current and desired pace of clinical development of our three product candidates, over the next 12 months we estimate that our research and development spending will be approximately $35 million to $40 million.

Interest income:

For the three months ended September 30, 2012, we recognized approximately $14,500 in interest income. We did not recognize any interest income for the three months ended September 30, 2011. Based on market conditions, we placed our excess funds in money market accounts and "high yield" savings accounts.


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Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

General and administrative expenses:

For the nine months ended September 30, 2012, G&A expenses were approximately $11.0 million. G&A expenses for the nine months ended September 30, 2011, were approximately $371,800, as we had not commenced meaningful operations during that period. G&A expenses for the nine months ended September 30, 2012, were as follows:

           General and administrative expenses    in thousands ($000)
           Professional fees                     $               1,744
           Payroll and related costs                             1,505
           Facility and equipment costs                            423
           Business taxes and licenses                             177
           Employee stock-based compensation                     6,539
           Other                                                   574

                                                 $              10,962

Major expenses incurred in professional fees were legal fees for SEC filings, intellectual property review, contract review and general legal support. We expect to continue to incur significant legal fees in the coming periods. We expect the facility expense to increase compared to the nine months ended September 30, 2012, as we entered into a lease for satellite office space in San Francisco, which commenced on November 1, 2012, and will have additional rent expense for the term of the lease. Payroll and related costs were approximately $1.5 million for the nine months ended September 30, 2012. Included in this expense is the salary, bonus accrual and benefit costs for the employees within the general and administrative group. Employee stock-based compensation included in G&A expenses for the nine months ended September 30, 2012 was approximately $6.5 million consisting of an increase in the valuation of the outstanding anti-dilutive warrant held by our CEO and President of approximately $6.2 million and approximately $288,800 of employee stock-based compensation, compared to $0 for the nine months ended September 30, 2011.

All other costs such as IT support, travel, recruiting and postage were approximately $575,300 for the nine months ended September 30, 2012.

Research and development expenses:

For the nine months ended September 30, 2012, R&D expenses were approximately $41.4 million compared to $0 for the nine months ended September 30, 2011. R&D expenses for the nine months ended September 30, 2012 were as follows:

    Research and development expenses                    in thousands ($000)
    Outside CRO/licensor services                       $              32,069
    Outside other clinical development                                  3,377
    Internal regulatory affairs and quality assurance                   2,914
    Internal clinical development                                       2,233
    Internal contract manufacturing                                       230
    Employee stock-based compensation                                     531

                                                        $              41,354

Ongoing outside CRO and licensor service expense of approximately $32.1 million was incurred during the nine months ended September 30, 2012. This included approximately $4.3 million of duplicate costs from licensor services for the ongoing clinical trials. When the transition is complete, we expect these duplicate charges to cease. We accrued approximately $7.1 million for licensor services provided during the nine months ended September 30, 2012 and approximately $18.2 million for pass-through costs related to the clinical trials. We also incurred approximately $6.7 million for services rendered by our CRO, which is taking over operational responsibility for our existing clinical trials. The licensor transition and clinical trial cost represents our estimate of such costs for the nine months ended September 30, 2012, and will be adjusted accordingly as the actual costs become known.

Outside other clinical development expenses, which are comprised of costs for data management, outside consultants, contract manufacturing and other clinical services, totalled approximately $3.4 million during the nine months ended September 30, 2012. Regulatory affairs and quality assurance of approximately $2.9 million, clinical development of approximately $2.2 million, and contract manufacturing of approximately $230,000 consisted of internal expenses, such as employee-related costs including payroll, benefits and travel. Employee stock-based compensation included in R&D expenses for the nine months ended September 30, 2012, was approximately $531,200.

While expenditures on current and future clinical development programs, particularly our PB272 program, are expected to be substantial and to increase, they are subject to many uncertainties, including the results of clinical trials and whether we


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develop any of our drug candidates with a partner or independently. As a result of such uncertainties, we cannot predict with any significant degree of certainty the duration and completion costs of our research and development projects or whether, when and to what extent we will generate revenues from the commercialization and sale of any of our product candidates. The duration and cost of clinical trials may vary significantly over the life of a project as a result of unanticipated events arising during clinical development and a variety of other factors, including:

the number of trials and studies in a clinical program;

the number of patients who participate in the trials;

the number of sites included in the trials;

the rates of patient recruitment and enrollment;

the duration of patient treatment and follow-up;

the costs of manufacturing our drug candidates; and

the costs, requirements, timing of, and ability to secure regulatory approvals.

Interest income:

For the nine months ended September 30, 2012, we recognized approximately $62,600 in interest income compared to $0 in interest income for the nine months ended September 30, 2011. Based on market conditions, we placed our excess funds in money market accounts and "high yield" savings accounts.

Liquidity and Capital Resources

The following table summarizes our liquidity and capital resources as of
September 30, 2012 and is intended to supplement the more detailed discussion
that follows:



   Liquidity and capital resources (in thousands ($000)    September 30, 2012
   Cash and cash equivalents                              $             33,347
   Working capital                                                       7,457
   Stockholders' equity                                                  9,003

                                                           Nine months ended
                                                           September 30, 2012
   Cash provided by (used in):
   Operating activities                                   $            (19,203 )
   Investing activities                                                   (832 )
   Financing activities                                                     -

   Increase (decrease) in cash                            $            (20,035 )

Operating Activities:

We reported a net loss of approximately $52.4 million and negative cash flows from operating activities of approximately $19.2 million for the nine months ended September 30, 2012. Our net loss from Puma's date of inception, September 15, 2010, to September 30, 2012 amounted to approximately $62.7 million, while negative cash flows from operating activities amounted to approximately $21.0 million for the same period.

Net cash used in operating activities for the nine months ended September 30, 2012 includes a net loss of $52.4 million, reduced by approximately $33.2 million of adjustments to reconcile net loss to net cash used in operating activities. Adjustments include non-cash items related to expense of approximately $820,100 from the issuance of stock options, adjustments to the warrant valuation of approximately $6.2 million, depreciation and amortization of approximately $187,000 and an allowance of approximately $236,000 received from the landlord for our corporate headquarters. Other items included in the adjustment of net loss were an increase of approximately $26.1 million in accounts payable and accrued expenses, an increase of $159,000 in the accrual of deferred rent, and an increase of $489,000 in prepaid expenses and other assets. The increase in accounts payable and accrued expenses reflects charges from transition activities billed to us as we assume clinical trial responsibilities from the licensor of the Company's lead product candidate, of which approximately $4.3 million represents duplication of effort as the licensor transferred clinical trial knowledge and responsibility to us.


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Investing Activities:

Net cash used in investing activities was approximately $832,000 for the nine months ended September 30, 2012. Payments of approximately $437,000 for the purchase of computer equipment and systems and approximately $237,000 related to leasehold improvements were included in net cash used in investing activities. Additionally, to secure the office lease located in the San Francisco area, a standby letter of credit was required. As collateral to that standby letter of credit, approximately $157,000 was moved to the restricted cash account held by Wells Fargo.

Financing Activities:

We did not engage in any financing activities during the nine months ended September 30, 2012.

Current and Future Financing Needs:

We have incurred negative cash flows from operations since we started our business, and we expect to continue incurring significant losses for the foreseeable future. We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including our planned product development efforts, our clinical trials, and our research and development efforts. We completed an equity offering in October 2012 (see Note 7 in the accompanying notes to the condensed financial statements - Subsequent Events - Financing). As a result of this offering, we anticipate that our cash on hand, including our cash equivalents, will be sufficient to enable us to meet our anticipated expenditures for at least the next 24 months. The actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control.

Our continued operations will depend on whether we are able to raise additional funds through a strategic alliance with a third-party concerning one or more of our product candidates, public or private sales of equity or debt and other sources of funds. Prior to the equity offering that we completed in October 2012, a significant portion of our financing was through private placements of our equity securities. We may seek to access the public or private equity markets when conditions are favorable due to our long-term capital requirements. We do not have any committed sources of financing at this time and in light of current economic conditions, including the lack of access to the capital markets being experienced by small companies, particularly in our industry, there can be no assurance that such capital will be available to us on favorable terms or at all. In addition, we can give no assurances that any additional capital raised will be sufficient to meet our needs. If we raise funds by selling additional shares of common stock or other securities convertible into common stock, the ownership interests of our existing stockholders will be diluted. If we are not able to obtain financing when needed, we may be unable to carry out our business plan. As a result, we may have to significantly limit our operations, delay or discontinue the development of one or more of our product candidates or forego attractive business opportunities, and our business, financial condition and results of operations would be materially harmed. In such an event, we will be required to undertake a thorough review of our programs, and the opportunities presented by such programs, and allocate our resources in the manner most prudent.

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